Are Daily Deals Going To Help Your Business? Or Hurt Customer Loyalty?

For some businesses yes and for others, no. But I would be more concerned about your customer loyalty than the impact on profits. Any business can give away a product at 50% off.

Let’s say you have a $100.00 coupon you offer for $50.00 and you give the coupon company 50% of that so you net $ 25.00. If your margin is 40% or $40.00 on the $100.00 coupon where do you make up the difference of $15.00? Don’t say you will make it up on volume, because that is just bad math. Don’t think the people redeeming your coupon are going to become raving fans as they are bargain hunters (one survey says 19% will return and buy at full price), but do worry about the impact on your current customer loyalty. Your existing customers are what got you to this point.

I have never made a purchase from a Daily Deal website, but I know many people who are hooked on the “next deal” and a few merchants that wish they knew more about redemption rates and fees before they got started. Anecdotally I am finding people saying things like “I am going go-karting/out to dinner/sky diving this weekend. Not because I want to, but because I got a 50% off coupon so why not?”

Groupon is the elephant in the Daily Deal room, but there is no shortage of Daily Deal websites competing against them. (See below) Not only are there dozens of daily deal websites, but there are dozens of Agreggator websites earning affiliate fees for directing traffic to these websites. And as with any new online  marketing idea there are startups filling in the gaps such as Skeedka who offers a service to match sellers and buyers of coupons that are not going to get used.

Here area few of the Daily Deal websites.

Dealster
Groupon
Living Social
BuyWithMe
OpenTable

As a marketer here are my main concerns about your business venturing into the Daily Deal marketing game:

  1. If your margin is 50% and you drop it to 40% with a coupon you will have to make 25% more sales just to replace the lost profits.
  2. Your competitors are watching and there are two potential problems. They tell everyone about your coupon, encourage them to take advantage of it and the redemption rate increases dramatically or they see it as a sign your business is faltering.
  3. The loyalty rate of coupon buyers is low (some say 15%) and you are impacting service to your regular customers.
  4. Will your loyal customer continue to pay full price or are you training them to wait for the next coupon and get a deal?

Here is a great study conducted by Utpal M. Dholakia* of Rice University published June 13, 2011 titled “How Businesses Fare With Daily Deals: A Multi-Site Analysis of Groupon, LivingSocial, OpenTable, Travelzoo, and BuyWithMe Promotions“.

They examined the performance of daily deals run through five major sites in 23 US markets. The survey-based study of 324 businesses that conducted a daily deal promotion between August 2009 and March 2011 reported the following financial results:

  • 55.5% of businesses reported making money
  • 26.6% lost money
  • 17.9% broke even on their promotions.

Who took advantage of the daily deals?
Close to 80% of deal users were new customers and they spent $64.30 during that visit.

Did the new customer make a second purchase?
Significantly fewer users spent beyond the deal’s value or returned to purchase at full price. Just 35.9% of deal users spent beyond the deal’s face value, and only 19.9% returned to purchase at full price.

Would the businesses run another promotion?

  1. 48.1% of businesses indicated they would run another daily deal promotion
  2. 19.8% said they would not
  3. 32.1% said they were uncertain

What were the key findings?
Relatively few points of differentiation between the daily deal sites, making it harder for any one site to stand out from the others.
the relatively low percentages of deal users spending beyond the deal value (35.9%) and returning for a full-price purchase (19.9%) are symptomatic of a structural weakness in the daily deal business model less than half of the businesses indicated enthusiasm about running another daily deal in the future fully 72.8% indicated openness to considering a different daily deal site only 35.9% of restaurants/bars and 41.5% of salons and spas that had run a daily deal asserted they would run another such promotion in the future.

The Conclusion
Over the next few years, it is likely that daily deal sites will have to settle for lower shares of revenues from businesses compared to their current levels, and it will be harder and more expensive for them to find viable candidates to fill their pipelines of daily deals.

What if you buy a coupon and can’t use it?

I have no personal experience with this company, but Skeedka offers a service to match sellers and buyers of coupons. You can log into their website and view coupons people want to sell, make a bid and if successful make a payment to the seller using their preferred method. When you check out you will receive a link to the purchased voucher and it will be in your Skeedka account.

* Utpal M. Dholakia is an associate professor of management at the Jones Graduate School of Business, Rice University. This academic study was funded entirely through financial support received by the author from the Jones Graduate School of Business (JGSB), Rice University. I am deeply appreciative of Rice University’s support of my research.

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2 Comments Add yours

  1. Ambrose Lee says:

    Splits are most definitely trending in favor of the merchant. The first deal i ran was a disaster. My staff became overwhelmed with the crowds, and in turn the experience for the customer was horrible. I ran into this company called Stampede – Daily Deal Liaisons. The worked through everything with me. From the deal itself, to the revenue split, to the timeframe, Stampede helped me alleviate so many issues that i ran into with my first deal and made my second and third deals so worth it, and i didn’t have to pay them 1 dollar, they get paid by the daily deal companies.
    http://www.jointhestampede.com

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